Bursting Bubbles

by Dean Baker, from In These Times

| June 6, 2003

Bad things always happen in threes, right? If economist Dean Baker is right, the stock market bubble was just the first of three that will all eventually burst and wreak havoc on the U.S. economy. The second is the U.S. dollar bubble—a few brave economists are already starting to talk about the possibility of deflation, a completely foreign concept to most Americans since the dollar has been steadily inflating since the Great Depression. The third bubble is the housing market. On paper, the dollar value of houses is rising steadily, but when the bubble bursts homeowners could be in for a shock. "If someone borrows $270,000 to buy a $300,000 home, and the price falls by one-third, this leaves them owing $70,000 more than the home is worth," writes Baker. "When this happens there is a huge incentive to just let the mortgage holder foreclose on the home." He asserts that banks will be in a dangerous situation if too many people are forced to foreclose. And thanks to the fact that we import far more goods than we export, coupled with the federal government's current borrowing habits ($550 billion a year from abroad), we will eventually have to pay off our debt by selling U.S. assets. "If the trade deficit remains at its current level, within a decade foreigners will own the entire stock market, much of the government debt and many of our homes," writes Baker. Why should we heed Baker's warning? Well, in December 1999 he predicted the imminent stock market crash in an article titled "After The Fall" for In These Times. But you might have missed it amidst all the sky's-the-limit rhetoric being spouted by cheerleading economists. Who can blame them? They want to keep their jobs. Just ask former Treasury Secretary Paul O'Neill what happens when money men don't stay positive about the dollar and the Homeland economy.—Nick Garafola